US consumers and businesses are already starting to feel the pain from Trump’s trade war, and the worst is yet to come

July 9, 2018NewNewsIDComments Off on US consumers and businesses are already starting to feel the pain from Trump’s trade war, and the worst is yet to come

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President Donald Trump.
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Consumers and businesses have already begun to feel the pinch of President Donald Trump’s trade battles with the rest of the world, and the pain may be just starting.

Trump has launched protectionist trade campaigns aimed at countries from Canada to China. Effects of Trump’s tariffs are starting to pop up in reports of inflation data and confidence indicators and in the decisions of some high-profile businesses.

The latest consumer price index released by the Bureau of Labor Statistics showed the average cost of laundry equipment jumped 7.4% from April to May after leaping 9.6% in the previous month.

This is compared with a 0.2% price increase for all items.

Neil Dutta, the head of US economics at Renaissance Macro Research, also pointed to the soaring cost of consumer appliances as evidence the tariffs were starting to drive up costs.

“Even though core commodity CPI has been deflating, there have been pockets of tariff related pressure,” Dutta said in an email.

Over the past three months, he said, CPI for household appliances was up 15.7% on a seasonally adjusted annual rate.

And companies are seeing the cost of raw materials rise as well.

Since the Commerce Department’s recommendation to impose steel tariffs came on February 16, the price of steel has soared. According to CME Group, the cost of US Midwest Domestic Hot-Rolled Coil Steel — a proxy for domestic steel prices — jumped from $694 just before the recommendation to $907 on Thursday, a 30% increase.

Canadian lumber tariffs were first imposed in April 2017, with additional rounds coming later in the year. The price of lumber used in housing has jumped and is starting to filter down to homebuyers. The National Association of Home Builders, the largest US industry group, warned in April that these tariffs were putting a cost squeeze on builders and making new homes pricier.

Tom Derry, the CEO of the Institute for Supply Management, told Business Insider that business contacts were already starting to shift their decision-making because of the higher prices.

“Statements that we hear are that people are already looking for alternative locations for supply,” Derry said. “They’re already seeing their suppliers impose higher prices and are paying higher prices for steel and aluminum products. It’s been quite a disruption. If you have a highly machined part that requires special skills, it takes a while to identify qualified suppliers.”

More could come if Trump continues down a protectionist path. For instance, Trump has threatened to hit car and truck imports with 20% tariffs.

“Demand remains robust, but the nation’s employment resources and supply chains continue to struggle,” said Timothy Fiore, the chair of ISM’s survey committee. “Respondents are overwhelmingly concerned about how tariff-related activity is and will continue to affect their business.”

Respondents to the survey said their companies were bracing for the worst.

“US tariff policy and lack of predictability, along with the threat of trade wars, is causing general business instability and is a drag on growth for investments,” one manufacturer of electrical equipment said.

A food, beverage, and tobacco producer said the tariffs were prompting the company to shift some of its operations outside the US.

“We export to more than 100 countries,” the person said. “We are preparing to shift some customer responsibilities among manufacturing plants and business units due to trade issues (for example, we’ll shift production for China market from the US to our Canadian plant to avoid higher tariffs). Within our company, there is a sense of uncertainty due to potential trade wars.”

Trump with Canadian Prime Minister Justin Trudeau during the Women’s Entrepreneurship Finance event at the G20 Summit in Hamburg, Germany, last year.
Evan Vucci/AP

The latest Markit Manufacturing Purchasing Managers Index found that manufacturing production growth fell to its lowest level in nine months.

This downturn was reflected in manufacturing businesses’ confidence, said Chris Williamson, Markit’s chief business economist.

“Risks are tilted to the downside for coming months. Business expectations about the year ahead have dropped to a five-month low, led by the weakest degree of optimism for nearly one and a half years in manufacturing,” Williamson said. “Exports are back in decline, showing the worst performance for over two years, causing factory order book growth to slump sharply lower compared to earlier in the year.”

“Investment decisions are being postponed because there is no certainty around the trade relationships,” said Derry, the CEO of the Institute for Supply Management. “And that has a real immediate negative impact on the US economy, because rather than making capital investment decision we’re just postponing them. That capital expenditure is not being made, we’re not adding to production capacity.”

Companies are shifting decisions because of tariffs

Trump’s trade wars have also caught individual companies in the crosshairs. Perhaps the highest-profile example: Harley-Davidson, which announced it would shift some production out of the US.

But small businesses are feeling the pinch as well. During a recent hearing with Commerce Secretary Wilbur Ross, Sen. Claire McCaskill highlighted the plight of the Mid Continent Nail Corporation in her home state of Missouri.

Pablo Martinez Monsivais/AP Images

The company produces nails using a type of steel that is not made in the US. In response to cost increases for that metal, the firm has laid off 60 temporary workers. It has warned that another 200 people could be out of jobs soon. And it says it could shut down by the end of July unless it gets an exemption to avoid the tariffs.

“Something would have to happen very fast, within days, in order for us to know that things were going to improve,” Elizabeth Heaton, a spokeswoman for Mid Continent Nail, told local media. “We’re hoping that this could get pushed through very quickly.”

Harley and Mid Continent most likely won’t be the last businesses to feel the pinch of the tariffs.

“I don’t think the administration understands the broader impact,” Derry told Business Insider. “If they’re focused narrowly on steel and aluminum, they’re really missing the point on the harm to the broader US economy.”

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